The forum isn't good for my work habits, but at least I'm getting some questions answered.

Playing a round with the girlfriend's dad, so you can guess I took the strokes. . .

Errant tee shot crosses into lateral hazard. Found ball and declared unplayable. I proceeded to drop my ball within 2 club lengths of where the ball last crossed the red line no closer to the hole. Said ball then rolled down the embankment and back into the lateral hazard. However, the ball came to rest in a dry, flat spot, no nearer to the hole, and was playable. I knew I had the option to redrop, but I thought I could play this drop at my discretion since the ball was no nearer to the hole.

I proceeded to strike said ball onto the green. Lying 3.

GF's dad says that I had played from an illegal drop b/c the ball had reentered the hazard, and said that I should have taken another drop or placed the ball on the embankment had the second also reentered the hazard. So, 2 strokes for playing illegal drop. Drop(place) 6 on embankment and proceed to skull ball (7) from way below my feet. Chip (8), and 2-putt for 10. Assuming 2-putt from my first ball. 5-stroke swing according to my oppt's call.

Who was right?

Tough call. Where it's going wrong for you is when you is when you deemed the ball "unplayable" from a water hazard. You are not entitled to do this. You can either play it as it lies or proceed under rule 26-1b and drop accordingly. This is taking relief.
Under rule 26-1b, you are entitled to drop within another hazard and play it, not from the hazard you are taking relief from. If it rolls back into the hazard you are taking relief from, you must re-drop.
If it was matchplay, you lost the hole.
Now the bad news. In strokeplay, in addition to the 1 stroke penalty for the proceeding under rule 26-1, you receive a further 2 stroke penalty for playing from the wrong place (rule 20-7a) PROVIDED a serious breach of the water hazard rule was not involved. In this case you would have to correct your error before teeing off from the next hole, ie play a ball in accordance with rule 26-1 and add 2 penalty strokes, otherwise you would face disqualification. See decision 20-7/2.
So,... the marriage off then?

I think jaskanski had the bases covered on the ruling. Extra credit for noting that taking an unplayable is not allowed in a water hazard.

Stroke accounting:

1. Tee shot.
2. Penalty stroke under water hazard rule since you took relief.
3. Stroke to the green.
4. First of two penalty strokes for playing from the wrong place. (assume no serious breach)
5. Second of two penalty strokes for playing from the wrong place.
6. Putt #1
7. Putt #2 and holes out.

I don't see where the 10 strokes come from. If you must redrop because your first drop was bad, the redrops (or placement, if needed) are free.

There were extra stokes involved in reaching the green.

And I mispoke. I deemed that I couldn't not play the ball as it lie in the hazard (not declaring that it was an unplayable lie). I was taking relief in accordance to rule 26-1b.

Thanks for the help!

P.S. No marriage lined up yet.

They were just noting that you would never declare the ball unplayable in the hazard anyway, you just proceed to take your relief and go from there. You did everything right except drop twice and then mark the spot. Once you take relief from the hazard, you have paid for the pleasure of not hitting out of the hazard, that is why you see a tour caddy standing on the bank catching balls that are rolling back into the hazard, and then see officials mark the spot of contact so the player can place the ball after two attempts to take relief, assuming the earlier attempts fail to remain in play.

Remember, you aren't marrying her father....

Rank